THE extension of the Capital’s tram line to Newhaven is set to be approved in principle tomorrow after Labour and SNP groups agreed to back the move.

But no further action will be taken on the £162 million project to run the trams down Leith Walk until councillors have a closer look at the business case and consult Lothian Buses over a proposed “extraordinary” dividend to help fund the line.

Tomorrow’s full council had been due to give the go-ahead for the first tranche of spending on the extension, which officials say can be built without affecting the council’s day-to-day budget. But the city’s ruling Labour-SNP coalition was split, with Labour keen to see the route completed and the SNP arguing the financial case was not robust enough when the council faces a massive spending squeeze.

Under the proposals, the initial works would be funded by £5m of dividend cash the council already has from Lothian Buses, plus a £20m extraordinary dividend it is requesting. The rest of the finance would be borrowed and repaid from “public transport revenues” – tram profits, but potentially also higher fares on both trams and buses.

At separate lengthy meetings last night, the two groups agreed to support the extension in principle, but to defer any further decision for three weeks until the next council meeting on December 10. The council’s chief executive will be instructed to write to Lothian Buses asking what impact an extraordinary dividend would have on the likelihood of future fare increases, fleet modernisation plans and other plans.

SNP group leader Sandy Howat said: “While we appreciate the first stage of development is designed to enable further analysis and refinement of key aspects of the business case, we must also be mindful of the need to provide best value to the Edinburgh taxpayer and ensure the future financial state of the council. There are questions to be answered before agreement can be expected, not just about the future financial and strategic security of our world-leading bus services, but also around the potential threats to the council’s future financial ability to deliver the wide range of services our citizens expect.

“Coalition members will be meeting over the coming weeks to inquire further into some aspects of the business case. We remain supportive of a future tram extension but not at the risk of the future financial security of this city.”

Council leader and Labour chief Andrew Burns said the business case being presented to the council spelled out how extending the tram line would benefit economic growth in the city.

“But prior to moving to the next stage of the project, it does make sense that we formally write to Lothian Buses to request what additional dividend resources can be made available to fund activities, ensuring complete clarity with regard to project finances,” he said.